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Brand Strength to Aid Keurig's (KDP) Growth Amid Supply Woes

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Keurig Dr Pepper Inc. (KDP - Free Report) has been resilient in a tough market, driven by strength across its businesses, robust market share gains, and in-market performances across categories and brands. The company remains poised to benefit from strength in the Beverage Concentrates and Latin America Beverages segments. Volume/mix benefits from the Packaged Beverages segment also bode well.

However, we cannot ignore the headwinds arising from supply-chain disruptions, which have been plaguing the industry. Input cost inflation, labor shortages, rising transportation and logistics costs, and supply-chain disruptions have been threatening the margins. These are likely to keep affecting the company in the near term.

The Zacks Rank #3 (Hold) company has a market capitalization of $52.1 billion. In the past year, KDP has gained 17.3% compared with the industry's growth of 15.7%. It also compares favorably with the Consumer Staples sector's growth of 6.8%.

 

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Factors Aiding Growth

Keurig has been experiencing continued strength in the Packaged Beverages segment. The segment reported sales growth of 6.9% in the third quarter. Segment sales rose 6.8% at cc, gaining from a favorable volume/mix of 1.5% and a higher net price realization of 5.3%. The segment benefitted from growth in CSDs, particularly Dr Pepper, Canada Dry, Sunkist, A&W, 7UP, and Squirt as well as growth in Polar and Mott's, somewhat offset by a decline in Snapple due to supply-chain issues and the weakness in Hawaiian Punch.

The company notes that there has been strong growth in at-home coffee consumption due to the work-from-home trend and the inability to visit coffee shops. Consequently, the Coffee Systems segment's sales advanced 5.3% year over year to $1,155 million in the third quarter. At cc, net sales advanced 4.6%, owing to a higher volume/mix of 5.7% and favorable net price realization of 1.1%. Volumes/mix gained from pod volume, stemming from strength in the at-home business and the recovery in the away-from-home business along with brewer volume growth. Meanwhile, brewer volumes rose 2.2% on higher consumer sales and gains from marketing.

The company's carbonated soft drinks business has been gaining traction, driven by core brand growth and successful innovation, particularly its new zero sugar variety. Sunkist emerged to become the leading fruit-flavored CSD brand with double-digit consumption growth, followed by a solid performance in Canada Dry, A&W and Squirt. The Dr Pepper brand is also performing well on robust consumption growth. The company's manufactured pods and tracked channels witnessed year-over-year market share growth of 83%. Brewer shipments rose 2.2% in the quarter, while brewer sales rallied 44% on a two-year basis.

Near-Term Headwinds

Like others in the industry, Keurig continues to witness headwinds related to input cost inflation, labor shortages, rising transportation and logistics costs, and supply-chain disruptions, which are likely to persist in the near term. Management is currently experiencing higher-than-anticipated inflation. It expects inflation, including the cost of goods sold, transportation, warehousing and logistics, and SG&A, to rise in the months ahead.

Headwinds related to the supply chain affected the non-carb beverage unit's sales in the third quarter of 2021. Alongside these, reduced government stimulus remains concerning.

Stocks to Watch

We have highlighted some better-ranked stocks from the broader Consumer Staples space, namely The Coca-Cola Company (KO - Free Report) , Diageo (DEO - Free Report) and The Boston Beer Company (SAM - Free Report) .

Coca-Cola currently has a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 14%, on average. Shares of KO have gained 19.3% in a year. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Coca-Cola's current financial-year sales suggests growth of 15.4% and that for earnings per share reflects growth of 16.9% from the year-ago period's reported figure. KO has an expected EPS growth rate of 8.2% for three-five years.

Diageo, a Zacks Rank #2 stock, has gained 39.7% in the past year. DEO has an expected EPS growth rate of 9.2% for three-five years.

The Zacks Consensus Estimate for Diageo’s current financial-year sales and earnings per share suggests growth of 30.7% and 13.5%, respectively, from the year-ago period's reported numbers.

Boston Beer currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 4.3%, on average. Shares of the company have declined 47.7% in the past year.

The Zacks Consensus Estimate for Boston Beer’s current financial-year sales and earnings per share suggests growth of 26.1% and 11.8%, respectively, from the year-ago period.